Ban on little-traded stock reduces risks: labor fund

LITTLE LIABILITIES:Citing a trading irregularities scandal last year, the Labor Insurance Fund said barring managers from buying certain types of shares was a prudent measure

Staff writer, with CNA

The decision to ban the purchase of “little-traded stocks” by the Labor Pension Fund was taken to avoid future liquidity risks, the Bureau of Labor Insurance said yesterday.

The ban has been in place since last year, bureau president Luo Wu-hu (羅五湖) said, adding that the move was made following a scandal last year involving irregular practices by fund managers involved in four state funds. The labor fund was also barred from trading small-cap stocks after the scandal.

Small-cap stocks are those with a market capitalization of less than NT$1 billion (US$34.29 million), while little-traded stocks are defined as those whose average five-day trading volume over the past 20 trading sessions is less than than 500,000 shares.

“Such stocks are not easily unloaded once purchased, which creates risk. Even if we win on the account books, we still risk being unable to sell them,” he said.

Luo made the remarks when he was invited to attend a legislative hearing on upgrading the performance of the fund’s management.

However, Chinese Nationalist Party (KMT) caucus whip Lai Shyh-bao (賴士葆) said banning this type of trading was “ridiculous.”

“The less intervention in the market, the better,” Lai said, adding that fund managers should be given free rein.

Minister of Civil Service Chang Che-shen (張哲琛) said that the Civil Servants Pension Fund would not ban the purchase of little-traded stocks, while Council of Labor Affairs Vice Minister Kuo Fong-yu (郭芳煜) said the council would review its policy on the matter.

Lai said that government pension funds often commission outside operators to get better returns on stock market investments, but this practice carries the risk of irregularities, as evidenced in last year’s stock manipulation by outside managers that caused heavy losses for the labor pension fund.

He said that if an insurance system could be adopted to minimize the risk of unethical fund managers, then high returns and risks could both be taken into consideration. Lai proposed that the relevant agencies conduct assessments within one month on requiring outside fund operators to take out “liability insurance.”

Lai said that if such a measure were taken, there would be no need to ban little-traded stocks.

Financial Supervisory Commission vice chairwoman Jennifer Wang (王儷玲) said she supported Lai’s proposal. She added that the commission is studying the matter, but that no insurance company currently offers such a product.

“If the four government funds decied that they have a need for this insurance, the commission will work with them toward that end,” Wang said.